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March 15, 2012

Goldman Sachs Ripped by Critics for History of Putting Profits Over Clients

Greg Smith’s very public resignation from Goldman Sachs has sparked heated discussions in the financial services industry, not only on the propriety of Smith’s New York Times op-ed but on the substance of the former Goldman executive’s accusations against the firm.

Asked if Goldman Sachs management puts profits over clients, Elliot Weissbluth of HighTower Advisors answered, simply, but emphatically: “Yes.” The CEO of the high-net-worth oriented RIA firm said there was an obvious problem not just with Goldman Sachs but with “all the fully integrated bank brokerage businesses” who tout “the ‘benefit’ — quote-unquote — of using an investment bank along with asset management services, brokerage services and lending services in one firm.

“If the firm…has adjacent [centers] and layers of profit, those are conflicts of interest that make money for the firm at the expense of the client,” Chicago-based Weissbluth told AdvisorOne in a phone interview.

As to Smith’s lament that he did not like selling his clients “a product that is wrong for them,” derivatives expert Janet Tavakoli, author of the just published e-book, “The New Robber Barons,” said Goldman’s misbehavior in this area was “not new” and well documented.

“Whatever Greg Smith’s motives were for coming forward and whatever the propriety of his writing the op-ed, he’s offering valuable confirmation for what others have been saying because he’s worked there for 12 years,” said Tavakoli (left), principal of Chicago-based Tavakoli Structured Finance, a derivatives and structured finance consulting firm.

In a phone interview with AdvisorOne, Tavakoli said Goldman had a history of “using clients to offload risks that they themselves found unacceptable.

“I’ve documented quite a bit of that in my new e-book,” she said, adding that Goldman was a key architect of “overrated and overpriced” CDO transactions whose “risks were not adequately represented to their clients” and “that should never have come to market.” She added that the firm was a huge beneficiary of the AIG bailout, receiving billions of dollars that should have been “clawed back” for its “fraudulent conveyance” of securities. “They should have been investigated not rewarded,” she says.

Tavakoli also faulted Goldman for its response to the Smith letter.

“Many have been vilifying them as morons who flunked statistics and logic by citing a survey by people who are being paid by the firm,” Tavakoli said. “I believe they are merely being disingenuous by crafting a toss-off response to a serious issue.”

HighTower Advisors’ Weissbluth says Goldman and firms with similar business models claim to offer “synergy” but instead provide “pure conflict” and “layers of profit” at client expense. He cites as an example a broker buying bonds for his client who calls the firm’s fixed-income desk.

“That desk is a profit center for the firm. The advisor has to make margin also. The financial advisor has to buy off the desk,” Weissbluth says. “You don’t have competition at work — you have captivity at work.

“HighTower has solved for those conflicts of interest,” he adds. “We force the balance sheets of the big firms to compete. We force the trading desks to compete; we force the asset managers to compete.”

In contrast, the HighTower financial advisor calls the fixed-income desk, “and that desk acts as a market participant." That desk is a servicing desk to that advisor, but not a profit center for Hightower.

Weissbluth says approximately 80 to 90% of the firm’s advisors are former wirehouse brokers. “We’ve replicated the infrastructure, but not the multiple layers of profit,” he says of HighTower’s unbundled services.

“We replicated the good parts of these large integrated models. But we structured out of our economic model any economic conflicts,” Weissbluth adds.